11/24/2011

AT&T PROPOSED ACQUISITION OF T-MOBILE USA IN TROUBLE WITH DOJ, SO IT CHARGES-OFF $4 MILLION NO-DEAL PENALTY IN 4TH QTR

NEW YORK—AT&T Inc. said Thursday it would take a $4 billion charge in this year's final quarter, an acknowledgment the company's proposed $39 billion acquisition of Deutsche Telekom AG's T-Mobile USA faces an increasingly uphill battle.

The charge represents $3 billion in cash and $1 billion in spectrum, as AT&T promised Deutsche Telekom in case the deal was unable to secure regulatory approval.

The two companies said that on Wednesday they removed their merger application with the Federal Communications Commission. In Frankfurt Thursday, Deutsche Telekom said it will continue to pursue the sale.

It said.

"As soon as is practical, Deutsche Telekom and AT&T intend to seek the necessary FCC approval."

AT&T said the companies would concentrate their efforts on first obtaining antitrust clearance from the Department of Justice, either by prevailing in the federal lawsuit the department has brought to block the deal or by "alternate means"—presumably a settlement. Approval is needed from both the FCC and the Justice Department.

On Tuesday, FCC Chairman Julius Genachowski said he would seek a hearing on the AT&T deal, an indication the agency doesn't support the merger. That precipitated the change in course by AT&T, which as recently as last week said it was confident it would receive regulatory approval to buy T-Mobile.

The FCC said Tuesday that a hearing before an administrative law judge would follow the conclusion of the Justice Department trial, slated to begin in February. AT&T has already pushed the expected closing date of the deal back three months to as late as June. The merger agreement requires AT&T to secure all necessary approvals by Sept. 20, though the companies could agree to extend the deadline.

For Germany's Deutsche Telekom, the wrangling means more uncertainty over T-Mobile's future as it struggles to find its own niche in the U.S. market. The company has lost about 850,000 contract customers this year. For AT&T, a protracted battle could strain critical relationships in Washington.

Bernstein analyst Craig Moffett said on Tuesday.

"AT&T still has to do business with these agencies going forward, so there is a political cost to pursuing this to the bitter end."

Obstacles to the merger are mounting. Sprint Nextel Corp., regional carrier C Spire Wireless and seven state attorneys general filed their own lawsuits against the merger, citing the potential for higher prices and diminished competition. And AT&T still faces scrutiny from the California Public Utilities Commission, which could rule the deal anticompetitive.

AT&T has said the merger will create new jobs and help it bring wireless broadband to more Americans faster and at lower cost. The deal would catapult AT&T ahead of Verizon Wireless as the largest U.S. carrier by subscribers.

FCC officials on Tuesday said they believed the combination of AT&T and T-Mobile would significantly diminish competition in the U.S. wireless market. They also questioned AT&T's statements that the merger would benefit consumers and allow the company to expand high-speed fourth-generation wireless service across the country faster.

Under the terms of the deal, T-Mobile was to receive $25 billion in cash and $14 billion in AT&T stock, equating to 8% share in AT&T upon finalization. If the deal fails, T-Mobile will receive $3 billion in compensation, surplus AWS spectrum from AT&T, and a reasonable roaming agreement.

The acquisition was supposed to be completed in about 12 months, pending approval of regulators, and both companies were to remain separate entities until then.

AT&T claimed they will be able to cover 95% of the US with 4G LTE coverage. If approved by the FCC, the deal will certainly go down as a game changer, as the number of major US wireless carriers will shrink from four to three.

Below is the March 20, 2011 press release announcing the proposed acquisition of T-Mobile USA by AT&T from Deutsch Telecom AG:

To give you some idea of the scale of this acquisition, the following is a summary of the AT&T acquisition of T-Mobile USA from Deutsch Telekom AG showing the scale of the two companies before and the new AT&T post-acquisition:

Click Image To Enlarge

The following maps show AT&T's LTE coverage before and after the acquisitioni of T-Mobile USA by AT&T from Deutsch Telecom AG.

Virginia:

Texas and Michigan:

As you can readily see that AT&T will have a virtual monopoly in Virginia, Texas and Michigan. That's not good for consumers.

AT&T has been trying to sell the idea that there is a radio spectrum shortage for wireless phones. However, Jon Healey of the LA Times wrote an article in April "Spectrum crisis? What spectrum crisis?". Healey explained AT&T's deal "would eliminate one of the four largest US mobile phone networks and leave just two companies - AT&T and Verizon Wireless - in control of more than 70 percent of the market." Cisco did a projection that shows the "demand for mobile bandwidth will increase at a slower and slower rate in the coming years, as the penetration of smartphones slows."

Feld explains that AT&T originally assumed all the regulatory agencies would roll over and let them buy T-Mobile USA. Things appeared to be moving along in AT&T's favor until early August when AT&T attorneys mistakenly sent an incriminating internal document to the Federal Communications Commission (FCC). The unredacted internal letter says AT&T could spend $3 billion to $5 billion and provide true fourth generation - LTE (Long Term Evolution) coverage to 95 percent of the USA, instead of buying T-Mobile USA and paying $39 billion. This killed AT&T's key talking point with regulators and the press. AT&T claimed that they need T-Mobile to increase LTE network coverage from 80 percent to 97 percent of the population.

All along AT&T has been applying a lot of lobbying pressure on Congress. On September 20th, 100 House Republicans signed a letter urging the Obama Administration to resolve the anti-trust lawsuit and let AT&T buy T-Mobile USA. Research shows that 99 of those 100 Republican Congressmen have received political donations from AT&T lobbying efforts since 2009, according to a Bloomberg review of campaign finance records. The article says AT&T lobbying has given $963,275 to those US lawmakers who are urging approval of the T-Mobile USA deal.

The Republicans are not alone in asking President Barack Obama to direct the Justice Department to settle this antitrust lawsuit. All 15 of the Democratic lawmakers, who signed their letter the same week as the Republicans, have benefited from AT&T’s lobbying money. In the 2010 election cycle, these Democratic lawmakers, were lobbied to the tune of $141,5000. Thus, AT&T has spent at least a million dollars attempting to influence Congress. More specifically to have Congress influence the President to make the US DoJ quickly settle their anti-trust lawsuit against AT&T's buyout of T-Mobile USA.

The DoJ complaint notes that the merger leads to unhealthy levels of concentration in 97 of the top 100 Standard Metropolitan Statistical Area (SMSA) markets. The Yankee Group analyzed the DoJ anti-trust suit assumptions and created a series of charts.

The audacity of those 100 Republican and Democratic lawmakers to urge President Obama to recommend to the Department of Justice to approve AT&T's acquisition of T-Mobile USA. I wish I had a list of those U.S. senators and congressmen. I have just sent an email urging President Obama NOT to approve this acquisition. This acquisition will not be good for consumers since it effectively gives AT&T penetration into 95% of U.S. households. I thought we broke up the AT&T back in the 1980's to prevent monopoly power.

If AT&T is charging off the $4 billion penalty if the acqusition is not approved by the FCC, then they must know with a high degree of certainty that the acqusition is not going to be approved. That stings, but since it's AT&T, that's just fine with me. I don't trust any of these telecomm's one iota.

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These two service provider giants better fix this. The radio spectrum shortage for wireless phones is getting worse these days. The merger is a good idea, but these two have to settle the issues prior to venturing into it.